As foreign investors continue to show interest in Myanmar’s oil and gas industry and explorations continue offshore the future looks bright for the country’s petroleum sector. With the increased importance of the extractive industries both in terms of the contribution to economic growth as well as government revenue the question arises of how to protect Myanmar from the resource curse?  Myanmar is not alone in facing this challenge. It has affected many low income but resource rich countries. For any country endowed with natural resources the question is how to turn its wealth into human development, employment creation and poverty reduction. Over the years the UNDP has engaged with numerous governments across the world to help them utilise the full potential of their natural resource towards this end.

One of the tools available for addressing some aspects of the resource curse is a sovereign wealth fund (SWF) established with the revenues from the extractive industries. Such a fund could have a number of potential benefits for Myanmar. For one, it could ensure that public expenditure is not significantly affected by fluctuations in world prices. This is a frequent problem for countries which depend on revenue from extractive industries. Public revenue plunges when petroleum prices fall which often leads to dramatic cuts in government spending and abandoned or postponed infrastructure projects. Another key advantage of a SWF would be to prevent a negative impact on exchange rates and inflation levels from a large influx of foreign currency, in particular Dutch disease which is can undermine the domestic manufacturing sector. For Myanmar a SWF could potentially play a role in supporting peace building and federalism through allocation of revenue from extractive industries directly to the regional governments. Finally, a Norwegian model savings fund for future generations is also a possibility option.

However, as UNDP’s engagement with governments of natural resource rich countries has shown, the establishment of a SWF is in itself only a small component of the framework for managing natural resource revenues. Frequently SWFs have become symbols of development and progress and are not necessarily promoted as solutions to specific macroeconomic or budgetary problems.  One of the key challenges for Myanmar would be to reform its current set-up with regards to management of revenue from extractive industries and ensure improved oversight and transparency. This is seen as critical in order to ensure that a SWF becomes an effective tool to achieve its policy objectives.

The creation of a SWF also requires that there is sufficiently fiscal space in order to allow revenue to be diverted to savings rather than spending. As the government is currently operating with a budget deficit of some 4.7 per cent of GDP according to the IMF  there is not currently much room for the creation of a SWF.

A final point is that experience has shown that it normally takes several years for a SWF to be established and until it has built up sufficient volume. While the establishment of a SWF would make economic and financial sense for Myanmar it would require a long-term perspective, both political and fiscal.

About the Author

Thomas Kring is an Economic Advisor with UNDP Myanmar. He has a PhD in Economic Development from University of Melbourne and has worked extensively on economic and human development issues for the UN in several different countries.

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